Emini Day Trading: The Magical Two Point Threshold

If you are a Emini day trader, you have to know the importance of the two point threshold. For some reasons, you see them everywhere and they can clue you in whether a move is sustainable or likely to end soon. Beginner traders often trade madly ignoring the subtle hints provided by Emini S&P right in front of their eyes. Indicator traders simply rejected the notion that sometimes you do not need the fancy indicators at all when you pay attention to the details like the two point threshold.

I’ll explain what the two point threshold is and how you can learn to read Emini S&P like a pro.

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Bots Love Two Points Moves

If you often take profit at 2 points or less, you are a scalper. Scalping is now a space dominated by bots in Emini S&P. It is important to change your style or switch to trade something other than Emini S&P so that you can still scalp efficiently. My suggestion is to learn how to trade the intraday swings properly so that you can throw away your security blanket and focus on better profits, not quick bucks.

Scalper bots often take profit at 1.5 to 2 points from the recent local extreme (i.e. visible swing high / low on your 1-minute chart) if they fade the trend based on order flow signals. You can never be as quick as they are if you waited for the price to bounce 3 ticks first. That includes those of you who auto place bracket orders around your fills. Your orders are always behind theirs. Giving in 1 tick to entry chasing the market and then giving in another tick to exit when your limit order could not be filled means frustration for you and profit for them.

The same counter-trend logic can be used in the completely opposite way in your favour. After a strong move of at least 8 points and then ES is capped within a 2.5 points pullback from the recent local extreme, you know there is a very good chance that the recent extreme will be revisited and likely exceeded by quite a few points. If the pullback extended to 3 points you know it is not what you are looking for. Picture perfect trading setup – low risk, high probability and strong positive expectancy. The only missing piece is you – whether you can accept reality and statistically proven concept over your fear of chasing a move.

Origin of The Two Point Magic

Before the bots dominate the game, there are many human scalpers. They love the fact that 2 points is a hundred bucks. Many traders simply look for 2 points a few times a day and wrap up right after. It is easy for them mentally. It also created the historical footprints of the infamous 2 points pullback. The humans did a for a reason although not a very good one. The bots doing this now simply because the quants found in the historical data to have this characteristics. So the human scalpers’ behaviour is now copied into the bots.

This is another example of historical events driving the bots doing what they are doing now. And in turn, the bots are shaping the market actions with footprints mimicking the historical data. It is like a disease that keep spreading.

Stops Are Hidden Behind The Swing Extremes Within Two Points

Where do people hide their stops? The same $100 threshold where people loves to take profits.

Hence those top and bottom pickers, under great mental stress and probably sweating hands, step in front of the Emini freight train to counter the move in progress would put a protective stop away from the perceived extreme by two points. Some who waited a bit until after their personal magic number of ticks bounced before entering the market would have to put in a slightly larger stop. Yet, what they do not know is that their aggregated actions lead to a cluster of stop orders placed 2 ticks to 2 points behind the recent extreme.

It is very easy to estimate the size of the stop orders hiding there. It is at least the number of contracts traded within 1 point of the extreme price level. The total size of the stop orders will continue to increase as the price move away from the extreme, confirming its importance so to speak, when the other traders with existing positions also adjust their stops behind the same price extreme. It is just how majority of traders manage their positions, so are many mechanical trading models.

At this point you should not be surprised that as a swing trend develops, the number of contracts with stop orders hiding behind the most recent extreme will continue to increase until the one sided move has exhausted its day trading supporters. Anytime a move clearing the last swing extreme against the trend by more than 2 points will lead to a strong reversal quickly. It is not because of someone stepping in. It is just the stop orders triggered and in turn leading to others ditching their positions.

If you have place your stop orders this way, use a very tight one – 2 ticks behind the recent swing high, the previous day high, etc.

Think about it. The moment the stops at 2 ticks behind the price level or swing extreme is triggered, so will the ones at 3 ticks away and beyond. Why not stop yourself out saving yourself a few ticks per contract. Some pro traders will go to the extend to take advantage of this phenomenon to stop their positions out at 2 ticks away and re-enter at 7 ticks with both orders pending there all along. You may call what they do a hack of the trading game but you have to admit it is a very good hack.

Reversals From Key Daily Price Levels Are Confirmed By Two Points

The love of two points with Emini S&P extends to test of significant daily price levels. If a price level is breached and subsequently retraced to 2 points away from the price level, the price level is rejected with the usual STOPD mechanism kicks in.

Notice that this behaviour is the complementary setup of the 2 point pullback mentioned above when Emini switching from strong trending mode into sideway or pullback. Once a strong trend with multiple 2 points pullback is over, you get at least a 4 points pullback.

The reason why 2 points is necessary to confirm rejection is actually very simple – the scalpers (both bots and humans) need that 2 points as a buffer to fade the current trend off the key price level. It this turns into a 1-2-3 reversal against the current trend, they’ve hit the jackpot. This is another low risk good reward setup that many traders seldom look into as they think they have missed the chance to get a good entry. What they have missed is that the real good trading setup actually starts after the 2 point confirmation.

Round Number Reversals Are Bounded By Two Points

Emini S&P has a very special affection with round numbers. It does not produce strong intraday tops and bottoms at the round numbers. If it is the case many people would have noticed. Instead, Emini S&P loves to turn within 2 points from the round numbers depending on the direction of the current counter-trend move.

For example, when Emini S&P is in an up trend on daily timeframe, the strong bottoms that ignite the daily continuation rally are often produced within 2 points below round numbers like 1900 and 1920. The same thing is true for down trend too. Emini S&P in down trend on daily usually finds major swing tops for the continuation within 2 points above the round numbers.

Reversals from these levels usually produce stronger moves than the ones that start from the mid-range end digits. This gives you a quick rule of thumb on what to expect from the turns.

This subtle behaviour also gives you a separate clue that is equally useful – when Emini S&P turns exactly at or slight better from the round numbers, those swing extremes are usually retested.

Summary

The characteristics of the two point threshold explained here is there since 1990s and never stopped working. It may sound surreal to many of you but historical data is telling us that this is just the way Emini S&P behaves. Check out the historical charts to get yourself familiar with the useful clues provided by the two point threshold. It will improve your trading game plan immediately.

“If you often take profit at 2 points or less, you are a scalper. Scalping is now a space dominated by bots in Emini S&P. It is important to change your style or switch to trade something other than Emini S&P so that you can still scalp efficiently. My suggestion is to learn how to trade the intraday swings properly so that you can throw away your security blanket and focus on better profits, not quick bucks.”

I see you recommend this a lot and maybe your recommendation is limited to the mini spooz? I ask this because on HSI I find the intraday swing approach extremely hard, especially when the market does multi-day trends. I find it hard because the market all of a sudden lacks reference points to lean on. So when the market goes into multi-day (or multi-week) trends my ability to catch intraday swings collapses which leads to frustration and ironically, despite the market moving a lot over several days this is when I get my largest losing streaks ;(

You just answered yourself. The HSI intraday timeframes no longer offers the move you are looking for hence the problem with your performance. You need to adapt to this new environment and that means likely change of instrument, change of timeframe or both.

“It is very easy to estimate the size of the stop orders hiding there. It is at least the number of contracts traded within 1 point of the extreme price level. The total size of the stop orders will continue to increase as the price move away from the extreme, confirming its importance…”

Great article LC. Thanks for addressing refinements to scalp trading. After the release of FOMC minutes today (Fed Minutes Day 1-8-14) the ES had only one 7 pt pullback attended my many tiny pullbacks in a hard 28 point uptrend. What filters or other insights can be used by otherwise frustrated scalpers who often vainly await 2 or more point pullbacks that don’t occur in hard trending markets?

In other words how can a countertrend scalper assess when to take profit and bail out of a failing reversal before getting burned by having awaited more than a 2 point pullback? I’ve also noticed that roughly $100 profit is often the limit of the first leg of a countertrend trade and am looking for insight to know whether to hang on to the trade while price hesitates around the $100 profit level, given the tendency to return to the inflection.

Specifically, in reference to your “1 point” comment above, once you compute “the number of contacts traded within 1 point” how is that information best used ? Is there a threshhold of accumulated stops from 1 point before an inflection point and shortly thereafter that persuades bots to prevent a larger reversal and run price back to the inflection price and beyond in order to those stops? Or perhaps some combination of other market metrics such as order flow, VIX, premium, $TICK, market profile, that warn against expecting the reversal to mature?

When one’s mindset is fixated on scalping, it is wrong to look for signs to hang on to the trade beyond 2 points. Scalping and trading the intraday swings are incompatible.

You have to have the right setup for the swing move in the first place. In other words, the contracts you entered the trade on a scalp should be completely separate from the ones you entered with the swing setup. It is just somehow happening at the same time.

There should be no “conversion whatsoever” because it will then ruin the expectancies for both the scalp setup and the intraday swing setups.

“Thanks, I needed that.” Clear reasoning. It’s not easy for one pedaler to pedal two bicycles with different gearing at the same time. Best I’ve been able to do is ride 1 ten-speed backwards from the handlebars in my youth, which doubtless corrupted my expectancies when transferring daring innovations to futures trading. In analyzing trades a few weeks ago I noticed across 15 or 20 scalp trades that Average Max Favorable excursion exceed Average Max Adverse excursion, but holding on to both handlebars for the larger intraday swing with tight scalping stops resulted in net average loss as profits ceased to remain within easy reach in my “bicycle baskets” as I tried to sync gears and my allegorical bikes sharply diverged while I did the splits into a hard landing.

So, for sober clarification, if there are 200k contracts traded 1 point before the closest swing extreme are you saying that price is more likely to return to run stops beyond the recent swing before it seriously breaches, if ever, the 2 point threshhold? Or do you keep on counting past the turn until roughly 200k has been reached then be quick to bail unless by then the 2 point boundary has already been well-breached? Am I making it too exact a science? Is there a systematic way to adjust what the threshhold is or is that a discretionary skill from your career of constant close observation?

Good that you identified the problem from actual records. This means you have a new task on hand – figure out how to incorporate the swing decisions into your routine so that you know you are entering a part of the position for swing only.

The 200K contracts is another magic number in many setups related to ES trading.

What you described is not quite what I mean.

I guess it is time to put this into another article explaining the technique.

The 200K threshold is an accumulated value over those swings from each and every one of the counter-trend extremes. i.e. lower highs in down trend and higher lows in up trend. Once the threshold is reach, ES is way more easy to break the trend and back to one timeframe higher support / resistance zone.

I look forward to your findings and observations in this area LC. I’ve been using 200K tick x3 SMA on the hi & lo’s, as a confirmation of trend until the end for some time. It isn’t useful for entries/exits, only direction, and only for swing trades. It usually means more than 2 and 4 pts reversals before confirmations. But, a long wick/shadow often indicates potential trend failure and it’s extreme is frequently revisited before the failure. In higher volty conditions like we’ve had recently, 244K is less noisy, more stable. I haven’t backtested with volty as an independent var, but observation and logic supports the premise. My tick data (from IB) is too messy for me to trust anyway.

I have many more useful research done about the trading volume and their relationship with turning points. Just that I have some personal matters that is taking up more time than usual lately. Will continue to add more good stuff at a slower pace.